How to Take a Short Term Neutral to Bullish View using 4 Legged Option Strategy

How to Take a Short Term Neutral to Bullish View using 4 Legged Option Strategy

In this tutorial, we are going to look into a mild variation of Double Diagonal Spread to take a neutral to the bullish view. Double Diagonal Spread is a 4 legged option strategy and nothing but a combination of bull call diagonal spreads and bear put diagonal spreads which is more of a neutral approach towards trading.

Let see how we can take a mild bullish bias with a slight variation in Double Diagonal Spreads.



Lets get some primer on Diagonal Spreads and Calendar Spreads before jumping into the actual trading strategy example

A calendar spread is a strategy involving buying longer term options and selling equal number of shorter term options of the same underlying stock or index with the same strike price

A Diagonal spread is a strategy involving buying longer term options and selling equal number of shorter term options of the same underlying stock or index with the different strike price

A Double Diagonal Spread is a neutral approach combining two strategies Bull Call Diagonal Spread + Bear Put Diagonal Spread and here is the sample payoff graph. It can also be viewed as short strangle in a short month options contract (For example . current month contract) hedged with long strangle on both sides in the long month options contract (for example next month contract.)

Double Diagonal Spread Payoff Graph



Now in order to take a mild bullish approach at the same time hedging the positions on both sides, one can consider going for a Bull Call Calendar Spread + Bear Put Diagonal Spread for the increased width in the profitability spread as shown below

Modified Double Diagonal Spread Payoff

Strategy is composted of 4 legged strategy with a holding period till current month expiry hedged with next month long options on both the sides as shown below

Actual Position

Sell 11200 Puts – Jul 2020 Contract at Rs173/lot
Sell 11500 Calls – Jul 2020 Contract at Rs 27.05/lot

Hedge Position

Long 11100 Put – Aug 2020 Contract at Rs 299/lot
Long 11500 Call – Aug 2020 Contract at Rs 158.90/lot

Lower Breakeven Levels – 11045
Upper Breakeven Levels – 11723

Risk: Downside risk and Upside risk protected on both sides

The strategy is built to manage up to 680 point range ie 11045 – 11723 levels

Exit one sided spreads on Trigger of Stops to reduce the risk further.

Nifty Index Downside stop-loss for Exiting Bear Put Diagonal Spread: 10950
Nifty Index Upside stop-loss for exiting Bull Call Calendar Spread: 10750

Margin Required : Rs 47904/- (approx)

What if Analysis for holding the spread till July 2020 Expiry

Nifty Index Expiry DayProfit/Loss in Rupees per set
10,900.0030-Jul-20-7,539.93
10,925.0030-Jul-20-6,413.83
10,950.0030-Jul-20-5,241.50
10,975.0030-Jul-20-4,022.19
11,000.0030-Jul-20-2,755.19
11,025.0030-Jul-20-1,439.85
11,050.0030-Jul-20-75.56
11,075.0030-Jul-201,338.21
11,100.0030-Jul-202,801.97
11,125.0030-Jul-204,316.15
11,150.0030-Jul-205,881.12
11,175.0030-Jul-207,497.21
11,200.0030-Jul-209,164.66
11,225.0030-Jul-209,008.68
11,250.0030-Jul-208,904.40
11,275.0030-Jul-208,851.88
11,300.0030-Jul-208,851.14
11,325.0030-Jul-208,902.13
11,350.0030-Jul-209,004.71
11,375.0030-Jul-209,158.73
11,400.0030-Jul-209,363.94
11,425.0030-Jul-209,620.04
11,450.0030-Jul-209,926.67
11,475.0030-Jul-2010,283.43
11,500.0030-Jul-2010,689.85
11,525.0030-Jul-209,270.41
11,550.0030-Jul-207,899.52
11,575.0030-Jul-206,576.58
11,600.0030-Jul-205,300.91
11,625.0030-Jul-204,071.80
11,650.0030-Jul-202,888.49
11,675.0030-Jul-201,750.19
11,700.0030-Jul-20656.07
11,725.0030-Jul-20-394.75
11,750.0030-Jul-20-1,403.16
11,775.0030-Jul-20-2,370.09
11,800.0030-Jul-20-3,296.48

Source: Marketcalls

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